ECON pt 3 (12, 13, 14, 15, 16)

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Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has A. $50 in required reserves. B. $200 in required reserves. C. $200 in excess reserves. D. $50 in excess reserves.

A. $50 in required reserves.

When the price level rises from 104 to 124, real GDP falls from $5 trillion to $4 trillion. What is a possible explanation for this event? A. Less investment B. Decreased consumption C. Falling exports D. All of the above

All of the above

Which one of the following is not one of the monetary policy goals of the Fed? Part 2 A. Maintain price stability. B. Reduce income inequality. C. Maintain high employment. D. Maintain stability of financial markets and institutions.

B. Reduce income inequality.

An increase in interested rate will _____ consumption

decrease

Net exports

exports minus imports

When the Fed conducts an open market purchase, the Fed ____and the money supply ______

- buys securities from banks - increases

The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called A. contractionary monetary policy. B. expansionary monetary policy. C. expansionary fiscal policy. D. contractionary fiscal policy.

B. expansionary monetary policy.

Explain how each of the following events would affect the long-run aggregate supply curve A. the price level increases. Because this is a change in the _____, the LRAS curve will _____.

- price level - not change

Between 2012 and early 2021, the average rate of inflation as measured by the core personal consumption expenditures (PCE) price index was 1.6 percent—below the Federal Reserve's target of 2 percent. Briefly explain why using the consumer price index (CPI) might yield a rate of inflation different from that found using the core PCE price index. The ________ price index includes all goods and services that are in the consumption component of GDP, while the _______ price index includes only the goods and services that are in the market basket that the Bureau of Labor Statistics uses in calculating it.

- PCE - Consumer

The Covid-19 pandemic caused the aggregate demand curve to ________ and the aggregate supply curve to ________, resulting in ______ in real GDP. In order to for real GDP to return to potential, the appropriate approach is _______ policy.

1. shift to the left 2. shift to the left 3. a decrease 4. expansionary fiscal

Consider the following simplified balance sheet for a bank: Assets Reserves $10,000 Loans $66,000 Liabilities Deposits $70,000 Stockholders' equity $6,000 The maximum amount by which the bank can expand its loans is $_______.

$3,000

As prices rise, household wealth ___. Higher prices result in

- As prices rise, household wealth falls. - Higher prices result in lower consumption spending

Feb/2012 - M2: $9,785.7 - RGDP: $16,180 Feb/2022 - M2: $21,750.3 - RGDP: $19,736 % change from feb 2012 to feb 2022: - M2 - RGDP

- M2: 8.31% - RGDP: 2.01%

Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. Complete the following T-account to show the impact of this transaction. Assets: ____ Libalilites: ____

- Reserves in $10 mill - Discount loan in $10 mill

Why would the profits of U.S. multinationals be hurt by a strong dollar? With a strong dollar, U.S. firms will receive ____ dollars in exchange for the foreign currency. As a result, the value of their profits measured in U.S. dollars will _____.

- fewer - decrease

If Congress and the president are successful in keeping real GDP at its potential level in 2025, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action: with an expansionary fiscal policy Real GDP will be _____ Potential real GDP will _____ The inflation rate will be ______ The unemployment rate will be ____

- higher - the same - higher - lower

If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is constant, what will the inflation rate be?

investment tax incentives do what

increase investment

How are durable goods affected by interest rate

Higher real interest rates encourage saving rather than spending, so they result in lower spending on durable goods

How does durable goods being one lived impact household spending

Households can postpone buying them when incomes are down

When the value of the multiplier increases, all else equal, a change in expenditure will raise aggregate expenditure by ____ amount

a larger

Now assume that there is a large increase in demand for U.S. exports. At the new short run equilibrium, the unemployment rate will _____ compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.

be lower

consumer durables

cars, trucks RVs

Higher corporate income taxes on profits

decrease the money available for reinvestment and decrease incentives to invest by diminishing the expected profitability of investment.

Household spending on consumption goods vs consumer durables

household spending on consumption goods is less volatile than spending on consumer durables

What is purchasing of new houses included in and why

included in planned investment because in revisions households have reduced wealth and hence less inventive to invest in new housing

Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. Assume that before receiving the discount loan, FNB had no excess reserves The maximum amount of the $10 million that FNB can issue in loans is

$10 mill

If US price level rises slower than foreign price levels - U.S exports will ___ - Because ___

- U.S. exports will increase - Because U.S. goods become less expensive relative to foreign goods, so imports fall and exports rise

What causes the SRAS curve to shift left

1. An increase in the expected price of an important natural resource 2. An increase in the adjustment of works' and firm's prior underestimation of the price level 3. an increase in expected future prices

b. What implications does your answer to part (a) have for the way in which governments around the world typically compile statistics on imports and exports? As large firms rely more on global supply chains, it becomes ____ to keep track of the value of imports.

more difficult

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in the price level will cause a __________ the aggregate demand curve.

movement up along

Macroeconomic equilibrium occurs when

planned investment = actual investment

Largest contributor to cash flow

profit

How do interest rates fluctuating impact consumer spending on durables

rising late in an expansion (discouraging large purchases), and falling during and after a recession (encouraging those purchases)

Four Components of Aggregate Expenditure

Consumption (C) Planned Investment (I) Government Purchases (G) Net Exports (NX)

The increase in the number of people age 65 or older will result in _____in federal spending on Social Security and Medicare as a percentage of GDP.

an increase

As large firms rely more on global supply chains, it becomes more difficult to keep track of the value of imports. This is because A. using the global supply chain to supply intermediate inputs often leads to the double counting of many goods, making it more difficult to track the value of imports. B. GDP statistics have been updated to accurately reflect the complexity of the global supply chain, making it easier to track the value of imports. C. more countries will want to produce products entirely within their own country, making it easier to track the value of imports. D. the country that assembles and exports the final good often accounts for only a small portion of the value of the final good, making it more difficult to track the value of imports.

the country that assembles and exports the final good often accounts for only a small portion of the value of the final good, making it more difficult to track the value of imports.

Cash flow

the difference between cash coming in and cash going out of a business

Consider the following simplified balance sheet for a bank: Assets Reserves $10,000 Loans $66,000 Liabilities Deposits $70,000 Stockholders' equity $6,000 If the required reserve ratio (RR) is 10 percent, this bank currently holds $_______ in excess reserves.

$3,000

If. US GDP grows faster than foreign GDP - U.S exports will ___ - Because ___

- U.S exports will decrease - Because US demand for imports rises faster than foreign demand for our exports

2024: - PGDP: $20.8 trillion - RGDP: $20.8 - Price Level: 120.3 2025: - PGDP: $21.2 trillion - RGDP: $21.0 trillion - Price Level: 122.7 If Congress and the president want to keep real GDP at its potential level in 2025, they should use ______which would mean_____

- an expansionary fiscal policy - increasing government spending or cutting taxes

Explain how the Federal Reserve's choice of a price index to measure inflation can affect monetary policy. The Fed uses the _______ price index as its preferred measure of inflation. Because food and energy prices tend to be _______ volatile than other prices, using other price indices as its target for inflation could lead the Fed to either use a more _______ monetary policy than would be warranted to reach its goal of price stability, or to use a more _______ monetary policy than would be warranted to achieve its goal of high employment.

- core PCE - More - Contractionary - Expansionary

Marginal propensity to consume

The slope of the consumption function: the amount by which consumption spending changes when disposable income changes

Expectations o future profitability

- investment goods, such as factories, office building, machinery and equipment are long lived. Firms build more of them when they are optimistic about future profitability

Largest component of expenditure

consumption

What investment does AE model use over another and why

lanned investment, rather than actual investment; in this way, the definition of aggregate expenditures is slightly different from G D P.

Does consumption expand most years and why

yes, because income expands most years

How strong is the relationship between income and consumption

very strong cuz of straight line on graph. meaning Households spend a consistent fraction of each extra dollar on consumption

Which of the following gave the Fed a dual mandate? A. The Employment Act of 1946. B. The Federal Reserve Act of 1913. C. The Federal Trade Commission Act of 1914. D. The Clayton Act of 1914.

A. The Employment Act of 1946.

In an opinion column in the Wall Street Journal, Federal Reserve Bank of Minneapolis President Neel Kashkari stated, "The Federal Reserve needs to read the labor market correctly to determine how to achieve its dual mandate." What does Kashkari mean by "read the labor market correctly"? By suggesting that the Fed needs to "read the labor market correctly," Kashkari means that the Fed needs to be able to gauge how much more employment can expand without causing A. economic growth to accelerate. B. inflation to accelerate. C. economic growth to decelerate. D. interest rates to fall.

B. inflation to accelerate.

By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply. A. more; decrease B. fewer; decrease C. more; increase D. fewer; increase

B. fewer; decrease

The over-65 population is increasing so rapidly because A. infant mortality rose significantly after 1965. B. modern medicine benefited this group more than others. C. this group is the healthiest. D. after WWII, there was a "baby boom," but after 1965 birthrates fell.

D. after WWII, there was a "baby boom," but after 1965 birthrates fell.

An increase in expected future income will _____ consumption

increase

An increase in household wealth will _____ consumption

increase

First quarter 2022: RGDP = 19,735.9 First quarter 2027: RGDP = 21,977.79 Suppose this money growth target is adhered to, yet actual inflation over the period averages more than 2 percent per annum. From this it can be concluded that velocity during this period _____

increase

Lower real intersect rates result in ___ investment spending

What is not included in real government purchases vs what is

not transfer payments; only purchases for which the government receives some good or service

real government purchases include

purchases at all levels of government: federal, state and local

For example, Doubleday Publishing may print 1.5 million copies of the latest John Grisham novel, expecting to sell them all. If it only sells 1.2 million, it will have

unplanned increase in inventories

If the marginal propensity to consume is 0.60, a $40 increase in disposable income will lead to a $____ increase in consumption and a $___ increase in savings.

- 24 - 16

If US price level rises faster than foreign price levels - U.S exports will ___ - Because ___

- U.S exports will decrease - Because U.S. goods become more expensive relative to foreign goods, so imports rise and exports fall

If $US rises in value relative to other currencies - U.S exports will ___ - Because ___

- U.S exports will decrease - Because imports are cheaper, and our exports are more expensive. So imports rise and exports fall

If. US GDP grows slower than foreign GDP - U.S exports will ___ - Because ___

- U.S exports will increase - Because US demand for imports rises slower than foreign demand for our exports

Consider the data in the following table for the years 1969 and 1970 (where the values for real GDP and potential GDP are in 2012 dollars): 1969: - RGDP: $4.94 trillion - PGDP: $ 4.85 trillion - Unemployment: 3.5% The table does not give the inflation rates for 1969 and 1970. If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by _____ rather than _______

- a negative supply shock - an increase in aggregate demand.

If aggregate expenditure is less than GDP - inventories _____ - and _____

- inventories Rise - and GDP and employment decrease

If aggregate expenditure is greater than GDP - inventories __ - and ___

- inventories fall - and GDP and employment increase

According to the Taylor rule., what is the federal funds target rate under the following conditions? ≻Equilibrium real federal funds rate equals 2% ≻Target rate of inflation equals 2% ≻Current inflation rate equals 1% ≻Real GDP is 1% below potential real GDP The federal funds target rate equals

First quarter 2022: RGDP = 19,735.9 First quarter 2027: RGDP = 21,977.79 In other words, if real output grows from its level in the first quarter of 2022 to its potential as of the first quarter of 2027, the average annual rate of growth will be ______ percent.

2.18

Suppose the marginal propensity to consume increases from 0.68 to 0.94. The value of the expenditure multiplier will increase from ____ to ____

3.13 to 16.67

Money supply $2,500 Price level 1.17 Real GDP $7,000 The velocity of money is equal to:

3.28

Feb/2012 - M2: $9,785.7 - RGDP: $16,180 Feb/2022 - M2: $21,750.3 - RGDP: $19,736 On the assumption that velocity was constant during this period, it may be deduced that the average annual inflation rate was However, because actual annual inflation averaged 2.20%,it can be concluded that velocity during this period must have ____ .

6.3% Decreased

An article published in an economics journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Source: Atif Mian and Amir Sufi, "Who Spends Extra Cash?," House of Debt, April 13, 2014. Assume that the macroeconomy can be divided into three sections. Section A consists of the poorest households. Section B consists of the richest households. Section C consists of all other households. The value of the multiplier for Section A is

3.33

In a closed economy, consumers spend $400 regardless of the level of income, and the marginal propensity to consume (MPC) is 0.75. Investment is equal to $300. The government spends $500 and collects $50 in taxes. The equilibrium level of GDP in this economy is $

4650

An article published in an economics journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Section A consists of the poorest households. Section B consists of the richest households. Section C consists of all other households. The value of the multiplier for Section A is 3.33 The value of the multiplier for Section B is 1.54 If the MPC for the economy was 35 percent (or 0.35), the change in equilibrium real GDP would be $

6.16

Price Index Value in February 2021: - Consumer Price Index for All Urban Consumers: All Items: 263.35 - Personal Consumption Expenditures (Chain-type Price Index): 112.88 - Personal consumption expenditures excluding food and energy (Chain-type Price Index) 114.90 Value in February 2022: - Consumer Price Index for All Urban Consumers: All Items: 284.18 - Personal Consumption Expenditures (Chain-type Price Index): 119.95 - Personal consumption expenditures excluding food and energy (Chain-type Price Index) 120.99 CALCULATE INFLATION RATE from feb 2021 to feb 2022 for each category: - Consumer Price Index for All Urban Consumers: All Items: - Personal Consumption Expenditures (Chain-type Price Index): - Personal consumption expenditures excluding food and energy (Chain-type Price Index)

7.91 6.26 5.30

How would an increase in the growth rate of GDP in Canada and Mexico affect U.S. net exports? An increase in the growth rate of GDP in Canada and Mexico will A. increase U.S. net exports by increasing exports to these countries. B. increase U.S. net exports by decreasing imports from these countries. C. have no effect on U.S. net exports. D. decrease U.S. net exports by increasing exports to these countries.

A. increase U.S. net exports by increasing exports to these countries.

The major cause of these trends is A. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance. B. there has been a decrease in income tax rates for most households in the U.S. C. there has been a reduction in the nominal amount of government purchases on military as the U.S. does not engage in military conflicts. D. All of the above.

A. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________. A. fall; increase B. fall; decrease C. rise; decrease D. rise; increase

A. fall; increase

How are these automakers likely to react to the increase in inventories? A. Automakers will likely produce more trucks than they otherwise would have. B. Automakers will likely produce fewer trucks than they otherwise would have. C. It will induce automakers to raise the prices of their pickup trucks. D. They are not likely to make any changes to their production cycle since the increase is just part of the business cycle.

B. Automakers will likely produce fewer trucks than they otherwise would have.

planned investment vs actual investment

Planned investment = actual investment - unplanned change in inventories

Planned investment

Planned spending by firms on capital goods and by households on new homes

Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will ____ if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level

Shift left

Consumption (C

Spending by households on goods and services

The feral fund rate in feb 16, 99 was 4.63% In august 06, 1954 is was 1.38% Has the fed been able to keep the effective federal funds rate within target range? A. No, the Fed has not been able to keep the effective federal funds rate within the target range. B. Yes, the Fed has been able to keep the effective federal funds rate within the target range. C. It is not clear whether the Fed has been able to keep the effective federal funds rate within the target range or not.

Your answer is correct.

During recessions, profits ___ for most firms, causing a

during recessions, profits fall for most firms, decreasing their ability to finance investment

An increase in current disposable income will _____ consumption

increase

Aggregate expenditure (AE)

is total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in state income taxes will cause a ______ the aggregate demand curve.

leftward shift of

Higher real intersect rates result in ___ investment spending

less

In what circumstances would a borrower want to refinance a loan? Borrowers often refinance a loan in order to get a ________ than they were paying on the previous loan.

lower interest rate

Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is

not a part of fiscal policy

Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. Defense spending is increased. This is

not part of fiscal policy

Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The Federal Reserve lowers the target for the federal funds rate. This is

not part of fiscal policy

Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will _____ if there is an increase in expected future prices

shift to the left

shift to the right

Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will ______ if there is an increase in the labor force of capital accumulation

shift to the right

According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value. A. True B. False

true

If $US falls in value relative to other currencies - U.S exports will ___ - Because ___

- U.S exports will increase - Because imports are more expense, and our exports are cheaper. So imports fall and exports rise

- current expenses - long-lived capital goods.

What affects the level of consumption?

1. Current disposable income 2. Household wealth 3. Expected future income 4. The price level 5. The interest rate

5 reasons why spending on durable goods, like cars and RVs, is so volatile?

1. Durable goods are long lived 2. Good substitutes exist 3. High prices make them risky purchases 4. Pent-up demand typically follows a recession 5. Interest rates fluctuate

1.54

Aggregate expenditure model

A macroeconomic model that focuses on the short-run relationship between total spending and real G D P, assuming that the price level is constant.

Which of the following statements regarding aggregate expenditure and aggregate demand is correct? A. Aggregate expenditure shows the amount of desired spending from given levels of income, while aggregate demand shows the amount of desired spending from given levels of prices. B. Aggregate expenditure only includes government purchases and consumption, while aggregate demand includes government purchases, consumption, and investment. C. Aggregate demand shows the amount of desired spending from given levels of income, while aggregate expenditure shows the amount of desired spending from given levels of prices. D. Aggregate expenditure and aggregate demand represent the same concepts.

A. Aggregate expenditure shows the amount of desired spending from given levels of income, while aggregate demand shows the amount of desired spending from given levels of prices.

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP? A. Increase government spending or decrease taxes. B. Increase the money supply. C. Decrease government spending or increase taxes. D. Both A and B.

A. Increase government spending or decrease taxes.

An article in the Wall Street Journal on fintech firm Social Finances Inc. (SoFi) noted that "SoFi's main business of refinancing student loans is particularly sensitive to interest rates. Lacking its own base of deposits, the company borrows money at variable rates from banks to then lend to recent graduates." What does it mean to refinance a loan? A. It means that someone is taking out a new loan in order to pay off an old loan. B. It refers to the process that occurs when a borrowers defaults on a loan. C. It is a special type of loan that banks offer to people when they have difficulty obtaining loans from other banks. D. It is when the bank seizes an asset used as collateral and then sells it to pay off the loan.

A. It means that someone is taking out a new loan in order to pay off an old loan.

What effect does an increase in federal government spending have on the aggregate demand curve? A. It will shift the aggregate demand curve to the right. B. It will have no effect on the aggregate demand curve, because federal spending only affects aggregate supply. C. It will have no effect on the aggregate demand curve, because increases in federal spending result in equal decreases in consumer consumption. D. It will shift the aggregate demand curve to the left.

A. It will shift the aggregate demand curve to the right.

How are robots likely to affect the long-run aggregate supply curve (LRAS)? A. Robots would shift the LRAS curve to the right due to a technological advance. B. Robots would not affect the LRAS curve because they represent production at capacity. C. Robots would not affect the LRAS curve because it does not represent a change in the business cycle. D. Using robots would result in a movement down along the LRAS curve as prices fall.

A. Robots would shift the LRAS curve to the right due to a technological advance.

How are robots likely to affect the short-run aggregate supply curve (SRAS)? A. Robots would shift the SRAS curve to the right due to a technological advance. B. Robots would shift the SRAS curve to the right due to an increase in labor. C. Robots would shift the SRAS curve to the left due to an increase in capital. D. Using robots would result in a movement down along the SRAS curve as prices fall.

A. Robots would shift the SRAS curve to the right due to a technological advance.

Will the outcome you discussed above result in a movement along the U.S. aggregate demand curve or a shift of the aggregate demand curve? Briefly explain. A. Shift of the U.S. aggregate demand curve, because this is not a change in the price level. B. Movement along the U.S. aggregate demand curve, because this is not a change in the price level. C. Movement along the U.S. aggregate demand curve, because this is a change in the price level. D. Shift of the U.S. aggregate demand curve, because this is a change in the price level.

A. Shift of the U.S. aggregate demand curve, because this is not a change in the price level.

Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain. A. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans. B. No, this would indicate that Chinese banks must store more reserves at the central bank instead of the vault. C. No, this would indicate that Chinese banks are making more loans to households instead of businesses. D. Probably not, since there is no correlation between banks' willingness to make loans and the required reserve ratio.

A. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.

Who borrows money and who lends money at this "target interest rate"? A. The Fed borrows and banks lend. B. Banks borrow and banks lend. C. Banks borrow and the Fed lends. D. Banks borrow and investors lend.

B. Banks borrow and banks lend.

An article in the Wall Street Journal in 2017 noted that: "China now has one of the highest [required reserve] ratios in the world, economists say, even though many businesses are starved of credit..." What does the article mean by Chinese businesses being starved for credit? A. This would indicate that Chinese businesses must pay high interest rates on their loans. B. Being starved for credit means Chinese businesses cannot get loans. C. When Chinese businesses are starved of credit, it means they are not profitable. D. Being starved for credit means that Chinese businesses are holding excess cash.

B. Being starved for credit means Chinese businesses cannot get loans.

How has the Fed attempted to stimulate the economy during a typical recession? A. Convince the US Congress to engage in expansionary fiscal policy. B. Engage in expansionary monetary policy designed to lower the fed funds rate and encourage consumption and investment. C. Engage in expansionary monetary policy designed to raise the fed funds rate and encourage consumption and investment. D. Engage in contractionary monetary policy designed to lower the fed funds rate and encourage consumption and investment.

B. Engage in expansionary monetary policy designed to lower the fed funds rate and encourage consumption and investment.

Which of the following is not a main determinant of net exports? Part 2 A. The price level in the United States relative to price levels in other countries. B. Expectations of future profitability in the United States. C. The exchange rate between the dollar and other currencies. D. The growth rate of GDP in the United States relative to the growth rates of GDP in other countries.

B. Expectations of future profitability in the United States.

In what way was the Fed's approach during the Great Recession similar to its approach during the coronavirus pandemic? A. The Fed relied on the US Congress and its fiscal policy tools to minimize the depths of each recession. B. In both periods, the Fed rapidly cut fed funds rates to zero and directly intervened in the financial markets. C. In both periods it used the Main Street Lending Program to help struggling firms. D. It used credible inflation targets to reduce uncertainty that firms and households would otherwise have about future inflation rates.

B. In both periods, the Fed rapidly cut fed funds rates to zero and directly intervened in the financial markets.

The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Do the goods Mademoiselle Zelie received as payment fulfill the four functions of moneyLOADING...? A. No. The goods are not a medium of exchange. B. No. The goods are not a store of value. C. Yes. The goods fulfill all four functions of money. D. No. The goods are only a medium of exchange and store of value.

B. No. The goods are not a store of value.

What is price deflation? A. Price deflation occurs when the money supply increases at a rate far in excess of the growth rate of real GDP. B. Price deflation occurs when the price level declines from one year to the next. C. Price deflation occurs when the money supply grows at the same rate as real GDP. D. Price deflation occurs when the price level rises from one year to the next. Part 2

B. Price deflation occurs when the price level declines from one year to the next.

Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s. A. The statement is true. If there had been a contractionary policy, the price level would have fallen. B. The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level. C. The statement is uncertain because it is not possible to determine what policies the Fed has chosen. D. There is not enough information to tell whether the statement is true or false.

B. The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level.

b. Why might Thor and its dealers have allowed inventories of RVs to fall to such low levels? A. Thor Industries did not want to incur the carrying cost of storing inventory. B. Thor Industries did not anticipate Covid-19 and the effect that the pandemic would have on RV sales. C. Thor Industries did not have enough parts to produce the RVs. D. Thor Industries did not have enough workers to produce the RVs. Part 4

B. Thor Industries did not anticipate Covid-19 and the effect that the pandemic would have on RV sales.

In an article in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in 1913, President Woodrow] Wilson had to retain the support of...northeastern lawmakers while convincing southern and western Democrats that legislation would not... create a [single] central bank. Wilson's ingenious solution was federalism." When Congressman Brady stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act, he meant that A. Wilson persuaded Congress that they had an obligation to create a single central bank. B. Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington. C. Wilson deceived Congress because there is one central federal bank system. D. the Federal Reserve Act was a federal law.

B. Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.

According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." When sellers are willing to accept money in exchange for goods and services, money is acting as a A. standard of deferred payments. B. medium of exchange. C. store of value. D. unit of account.

B. medium of exchange.

Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates. A. buy; increasing; decreasing B. sell; decreasing; increasing C. sell; increasing; decreasing D. buy; decreasing; decreasing

B. sell; decreasing; increasing

In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? A. An increase in the money supply will decrease the price level because money will be worth less. B. An increase in the money supply will cause consumers to demand more goods. C. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. D. An increase in the money supply will increase the velocity of money, and thus there will be hyperinflation.

C. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

Does judging whether a deficit is excessive depend in part on whether the country is in a recession? A. A deficit is excessive because of its size and it should not matter if there is a recession. B. During a recession, the deficit is lower as tax revenue rises and spending increases making an existing deficit smaller. C. During a recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger. D. A deficit is judged to be excessive only if there is a recession.

C. During a recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger.

The country of Cubania was adversely affected by the global recession of 2008. David Oster, a sociology professor at the University of Cubania, is of the opinion that tax rates on wealthy individuals should be lowered. Since the wealthy have a higher level of income, a tax cut would significantly increase consumption and aggregate demand. Which of the following would weaken David's argument that tax cuts for the wealthy would increase consumption and aggregate demand? A. Cubania follows a progressive taxation system where the income tax rate increases with an increase in income. B. The interest rate in Cubania is currently at its lowest level in 15 years. C. Economic research shows that wealthy individuals have a high marginal propensity to save. D. Recently, there were some protests in Cubania against the high levels of income inequality in the economy. E. Cubania recently lowered duties on the import of luxury goods.

C. Economic research shows that wealthy individuals have a high marginal propensity to save.

In 2017, an article in the Wall Street Journal on the latest data on U.S. net exports noted that, along with other currencies: "The [the Chinese] yuan has risen this year against the dollar." The article also noted that there had been "Stronger [economic] growth in Asia and Europe..." What does the article mean that the yuan had "risen" against the dollar? A. It now takes fewer dollars to buy one yuan. B. U.S. goods are more expensive relative to Chinese goods. C. It now takes more dollars to buy one yuan. D. U.S. dollars have more value relative to the Chinese yuan.

C. It now takes more dollars to buy one yuan.

The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed? A. Having dual goals of high employment and economic growth does not create many issues because most of the time when the economy experiences economic growth, the economy also achieves higher rates of employment. B. As the Fed tries to ensure economic growth, it can also focus on financial market stability because efficient financial markets make it easier for investment to occur and create additional economic growth. C. The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money. D. Achieving the goals of price stability and economic growth can be difficult because often the forces that lead to economic growth also can make prices increase at a rate higher than the Fed would desire.

C. The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.

If current projections of federal spending on Social Security and Medicare are accurate, policymakers are faced with the choice of A. significantly restraining spending on these programs and/or relying more on the Fed to increase the money supply. B. changing the budget rules so that some of these expenses are moved off-budget and/or greater reliance on the Fed to increase the money supply. C. significantly restraining spending on these programs and/or greatly increasing taxes on households and firms. D. changing the budget rules so that some of these expenses are moved off-budget and/or greatly increasing taxes on households and firms.

C. significantly restraining spending on these programs and/or greatly increasing taxes on households and firms.

Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a "ripple effect" on employment. The ripple effect meant that A. the income earned by the Caldecott tunnel project workers would trickle down to those who would be still unemployed. B. other non-construction industries would also want to share the government's stimulus money. C. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers. D. the job creation would be restricted to the construction industry only as more workers would be hired by other construction companies.

C. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

A change in which economic variable indicates that an economy is contracting? A. industrial production B. employment C. real income D. All of the above.

The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle. The primary explanation for this is because: Part 4 A. with unemployment insurance, household wealth fluctuates less over the business cycle. B. with unemployment insurance, interest rates are unlikely to change with the business cycle. C. with unemployment insurance, business investment fluctuates less over the business cycle. D. with unemployment insurance, current disposable income fluctuates less over the business cycle.

D. with unemployment insurance, current disposable income fluctuates less over the business cycle.

Does a stronger dollar result in a movement along the U.S. aggregate demand curve or a shift of the curve? A. A stronger U.S. dollar will increase U.S. net exports and cause a movement up along the U.S. aggregate demand curve. B. A stronger U.S. dollar will decrease U.S. net exports and cause a movement down along the U.S. aggregate demand curve. C. A stronger U.S. dollar will increase U.S. net exports and shift the U.S. aggregate demand curve to the right. D. A stronger U.S. dollar will decrease U.S. net exports and shift the U.S. aggregate demand curve to the left.

D. A stronger U.S. dollar will decrease U.S. net exports and shift the U.S. aggregate demand curve to the left.

In what way was the Fed's approach during the Great Recession different to its approach during the coronavirus pandemic? A. During the Covid pandemic it brokered the acquisition of large financial firms that were considered too big to fail. B. During the Great Recession, it pursued a policy to help small and medium-sized firms, while during the Covid pandemic, it pursued policies to assist large corporations restart their global supply chains. C. During the Great Recession, it created and used new lending and credit facilities; during the Covid pandemic, it bought toxic bank assets and made loans to firms in exchange for mortgage-backed securities D. During the Great Recession, it bought toxic bank assets and made loans to firms in exchange for mortgage-backed securities; during the Covid pandemic, it created and used new lending and credit facilities.

D. During the Great Recession, it bought toxic bank assets and made loans to firms in exchange for mortgage-backed securities; during the Covid pandemic, it created and used new lending and credit facilities.

What is this non-standard monetary policy of net asset purchases called? A. Fiscal policy. B. Open market operations. C. Discount policy. D. Quantitative easing. The Federal Reserve _____ this non-standard monetary policy of net asset purchases you identified above.

D. Quantitative easing. - Has attempted

An article in the Wall Street Journal stated that in China, "carmakers continue to grapple with ... rising inventories." Source: Colum Murphy, "China's Automobile Sales to Slow Further in 2015," Wall Street Journal, January 12, 2015. Part 2 Carmakers in China might find that their inventories are rising unexpectedly because A. economic growth increased in the country. B. low-priced imports entered the market. C. their sales are higher than expected. D. their sales are lower than expected. Part 3

D. their sales are lower than expected.

During the early months of the Covid-19 pandemic, some people wondered why biologists seemed unable to answer many questions about the virus, including why children appeared rarely to become ill, why men were more likely than women to die from the virus, and why there was great uncertainty about whether some existing pharmaceuticals would be effective in treating the disease. What are some of the similarities between the problems biologists faced in understanding Covid-19 and the problems economists face in predicting recessions? A. Lags exist between the time a policy is enacted and when you see results from that policy. B. Both require a lot of trial and error since good data is not available in advance C. Predicting which variables are important in advance without data is impossible. D. Too many variables exist that affect the ability to quickly make accurate predictions. E. All of the above.

E. All of the above.

Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true, will support Harry's view that aggregate output can increase in spite of domestic inflation? A. The banking industry is strictly regulated by the central bank of Milovia. B. Most investors in Milovia find it more lucrative to invest in foreign assets. C. Stock prices of some of the leading firms in the economy have been continuously falling for the past year. D. The Milovian government increased personal income tax rates last year. E. The Milovian currency recently depreciated in the foreign exchange market.

E. The Milovian currency recently depreciated in the foreign exchange market.

Consumption function

The relationship between consumption spending and disposable income

An increase in price level will _____ consumption

decrease

How does cash flow impact planned investment

firms often pay for investment out of their own cash flow

In early 2021 as the value of the dollar strengthened, an article on bloomberg.com noted that a stronger U.S. dollar would "hurt the earnings of America's multinational companies." What are "American multinationals"? American multinationals refers to A. U.S. firms who produce goods that are not subject to exchange-rate changes. B. U.S. firms who create products that will appeal to many different nationalities. C. U.S.-owned firms that operate in other countries. D. foreign-owned firms that operate in the United States.

C. U.S.-owned firms that operate in other countries.

Tsuang Pey and Chang Jiang are debating economic growth in their country. Inventory in this closed agricultural economy is increasing and Tsuang thinks that this is a sure sign of declining demand and troubled times ahead. Chang, however, claims that the country has been through similar situations before but growth has never been too low for too long. He thinks that even if demand is currently low, things should improve in the medium term. Which of the following statements is most strongly supported by the information given in the question? A. Chang thinks that the country has never witnessed negative growth. B. Planned investment is currently equal to actual investment in this country. C. Unemployment in the country is expected to fall. D. The inflation level in the economy is at its lowest ever. E. Aggregate expenditure is currently lower than GDP.

E. Aggregate expenditure is currently lower than GDP.

the effect of a monetary policy change that causes a decrease in interest rates.

Shift the AD curve to the right

The hypothetical information in the following table shows what the situation will be in 2025 if the Fed does not use monetary policy. 2024 Potential Real GDP: $20.8 trillion Real GDP: $20.8 trillion Price Level: 124.0 2025 Potential Real GDP: $21.2 trillion Real GDP: $21.4 trillion Price Level: 130.0 If the Fed wants to keep real GDP at its potential level in 2025, it should

Use a contradictory policy

Explain how each of the following events would affect the long-run aggregate supply curve C. There is an increase in the quantity of capital goods. Because this is a change in the _____ , the LRAS will ________

- productive capacity of the economy - shift to the right

Explain how each of the following events would affect the long-run aggregate supply curve D. Technological change occurs. Because this is a change in the ______, the LRAS will ____

- productive capacity of the economy - shift to the right

Currency and coin held by the public $400 Demand deposits $1,300 Savings deposits $1,800 Small-denomination time deposits $5,000 Noninstitutional money market mutual fund shares $1,000 The M1 money supply is equal to $

3500

If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is growing at 1 percent per year instead of remaining constant, what will the inflation rate be?

An increase in the exchange rate between the dollar and other currencies will ___ net exports

decrease

decrease in taxes would impact the demand curve by

shifting it right

Government purchases

spending by all levels of government on goods and services

Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because A. the Employment Act of 1946 empowers the Fed to maintain low taxes and high employment. B. maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946. C. the two most important goals of the Fed are controlling inflation and the budget deficit. D. the Fed is entrusted by Congress to maintain price stability and low taxes.

B. maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.

From October 2021 to January 2022, business inventories decreased by $2164 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need? A. Aggregate expenditure was equal to GDP in this quarter. B. There is not enough information to determine the relationship between aggregate expenditure and GDP. C. Aggregate expenditure was greater than GDP in this quarter. D. Aggregate expenditure was less than GDP in this quarter.

C. Aggregate expenditure was greater than GDP in this quarter.

The greater the wealth of a household

the more it spends on consumption

An article published in an economics journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Section A consists of the poorest households. Section B consists of the richest households. Section C consists of all other households. The value of the multiplier for Section A is 3.33 The value of the multiplier for Section B is 1.54 If the MPC for the economy was 70 percent (or 0.70), the change in equilibrium real GDP would be $

13.3

An extra 1000 in wealth will result in

40-50 in extra annual consumption spending

Which of the following statements regarding net exports is not correct? A. Net exports are typically one of the largest components of aggregate expenditure. B. Net exports are the one component of aggregate expenditure that can have a negative value. C. Net exports are directly impacted by decisions made by consumers outside the domestic economy. D. Net exports consist of exports minus imports.

A. Net exports are typically one of the largest components of aggregate expenditure.

b. In which component of aggregate expenditure does the Bureau of Economic Analysis include purchases of new houses? A. Planned investment. B. Net exports. C. Consumption. D. Government purchases.

A. Planned investment.

Imagine a 45°-line (Keynesian cross) diagram in which the upward-sloping aggregate expenditure curve intersects the 45°-line at point A. The economy is currently in macroeconomic equilibrium at output level Y0. Suppose that investment decreases. If investment decreases, the aggregate expenditures line will ___ The new equilibrium levels of GDP and expenditures will be A. unchanged. B. where the new AE line intersects the 45°-line. C. where the new AE line interesects the original AE line. D. anywhere on the new AE line.

- shift down - B. where the new AE line intersects the 45°-line.

First quarter 2022: RGDP = 19,735.9 First quarter 2027: RGDP = 21,977.79 On the assumption that the quantity theory of money holds, i.e. that the velocity of money will be constant during this interval, it may be concluded that price inflation of 2 percent requires that the money stock grow by

4.18 %

Suppose that the equilibrium real federal funds rate is 1 percent and the target rate of inflation is 2 percent. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 2 percent Potential real GDP = $14.09 trillion Real GDP = $14.64 trillion The federal funds target rate is _____

4.95%

Multiplier effect

What is the cyclically adjusted budget deficit or surplus? A. The cyclically adjusted budget deficit or surplus requires the federal budget to always be in balance, therefore avoiding a deficit or surplus. B. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were below potential GDP. C. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were above potential GDP. D. The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP.

The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP.

consumer expenditure is largely determined by

how much money consumers receive in a given year

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in interest rates will cause a __________ the aggregate demand curve.

leftward shift of

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance? Part 2 The existence of unemployment insurance makes it _____ likely that consumption will fluctuate over the business cycle.

less

In early 2021 as the value of the dollar strengthened, an article on bloomberg.com noted that a stronger U.S. dollar would "hurt the earnings of America's multinational companies." a. Does a strong dollar exchange for more or fewer units of foreign currency than would a weak dollar? A strong dollar will exchange for ______ units of a foreign currency.

Consumption-smoothing

most people prefer to keep their consumption fairly stable from year to year

Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The individual income tax rate is decreased. This is

part of an expansionary fiscal policy

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. A faster income growth in other countries will cause a ______ the U.S. aggregate demand curve.

rightward shift of

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. An increase in government purchases will cause a __________ the aggregate demand curve.

rightward shift of

Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will _____ if there is an increase in the expected price of an important natural resource

shift to the left

Suppose you deposit $1,200 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.50? Part 2 The change in checking deposits is equal to:

$2,400

Assuming that they are widely adopted by firms, how are these software robots likely to affect the costs of the firms that buy them? A. Robots would decrease costs since less capital is required. B. Robots would decrease costs by requiring less labor. C. Robots would increase costs since worker productivity will fall. D. Robots would increase costs by requiring more labor.

B. Robots would decrease costs by requiring less labor.

Since the 1950s, total government expenditures, as a percentage of GDP, have ______ and total government purchases as a percentage of GDP, have _____

- increased - decreased

If aggregate expenditure is equal to GDP - inventories _____ - and _____

- inventories are unchanged - and the economy is in macroeconomic equilibrium

NX is affected by

- price level in U.S. vs price level in other countries - U.S. growth rate vs growth are in other countries - U.S. dollar exchange rate

Explain how each of the following events would affect the long-run aggregate supply curve B. Because this is a change in the _____, the LRAS will _______

- productive capacity of the economy - shift to the right

What affects the level of investment?

1. expectations of future profitability 2. interest rate 3. taxes 4. cash flow

What causes the SRAS curve to shift right

1. increase in the labor force or capital accumulation 2. an increase in productivity 3. a technological change

A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory where it was beginning to produce its Model 3 electric cars and its Nevada "Gigafactory" where it was producing lithium ion batteries for cars and other uses. The article quoted an investment analyst as saying: "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." Why might the analyst have been unsure of the size of the multiplier in this case? A. The real-world multiplier is not simple to calculate. B. It depends on whether people spend their additional income on cars, appliances, furniture, or other products. C. The analyst is not likely convinced of the success of Tesla's Model 3 electric cars. D. When production occurs in two different states—in this case, California and Nevada—the effect on GDP can vary.

A. The real-world multiplier is not simple to calculate.

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to A. buy U.S. Treasury securities from the public. B. buy U.S. dollars in the foreign exchange market. C. sell U.S. Treasury securities to the public. D. print U.S. Treasury securities and distribute them to banks.

A. buy U.S. Treasury securities from the public.

An article in the Wall Street Journal describing economic conditions in Argentina in 2019, before the arrival of the Covid-19 pandemic, noted that "Argentina's economy contracted again ... [as] private spending... fell 7.7% from a year earlier." Source: Jeffrey T. Lewis, "Argentina's Economy Contracts, as Joblessness Rises," Wall Street Journal, September 19, 2019. a. What does the article mean by "Argentina's economy contracted"? "Argentina's economy contracted" means that the economy was in ____ during the period.

a recession

If the economy does not experience an unplanned change in inventories, then ...

actual investment equals planned investment

If the economy experiences an unplanned increased in inventories then....

actual investment will be greater than planned investment

If the economy experiences an unplanned decrease in inventories, then..

actual investment will be less than planned inventory

An increase in the U.S. price level relative to other countries' price levels will ____ net exports

decrease

An increase in the growth rate of U.S. GDP relative to other countries' will ____ net exports

decrease

Use the quantity equation to explain the logic of Gesell's proposal for stamped money. How might the proposal have put an end to a deflation? Gesell's proposal would ________ the incentive that households and firms have to spend money. The result would be _______ in velocity. According to the quantity equation, if this result holds true, then for a given level of the money supply and real output, the price level must _______, thereby ending the deflation.

increase an increase increase

Why does price deflation increase the burden of a debt? Why might increasing the burden of debts make an economic recession worse? It increases the burden of a debt because it means that the debt must be repaid in money that is ___ in value Borrowers will have ____ money available to buy goods and services, resulting in ______ in consumer spending.

increasing less a decrease

Identify each of the following as: (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. The corporate income tax rate is increased. This is

part of a contractionary fiscal policy

Complete the following simplified bank balance sheet to show the immediate impact if the bank makes the loans in part (b) by creating deposit accounts for the borrowers within the the bank. Assets Reserves $_____ Loans $_____ Liabilities Deposits $_____ Stockholders' equity $_____

Assets Reserves $10,000 Loans $69,000 Liabilities Deposits $73,000 Stockholders' equity $6,000

How did the BEA's revised estimate of the change in business inventories affect the estimated difference between total production and total demand in the economy? A. It decreased the difference since increased inventories represent extra consumption by consumers. B. It increased the difference since increased inventories represent production that is not sold to consumers. C. It decreased the difference since increased inventories represent production that is not sold to consumers. D. It increased the difference since increased inventories represent extra consumption by consumers

B. It increased the difference since increased inventories represent production that is not sold to consumers.

If the Fed's policy is successful (contractionary monetary policy), what is the effect on the following indicators? Actual real GDP: __________ Potential real GDP: __________ Price level: __________ Unemployment: __________

Actual real GDP: decreases Potential real GDP: does not change Price level: decreases Unemployment: increases

What is the discount rate? A. The discount rate is the rate at which auto loans and mortgages are made. B. The discount rate is the rate at which banks lend to each other. C. The discount rate is the rate at which the Fed lends to banks. D. The discount rate is the rate at which banks lend to their best customers.

C. The discount rate is the rate at which the Fed lends to banks.

In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"? A. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further. B. Decreases in the price level cause the money supply to decrease, which makes it difficult to purchase goods. C. Banks will be unwilling to lend when prices are falling, causing a decrease in investment and a fall in demand. D. Deflation increases purchasing power, so it is not necessary to buy as many goods.

A. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.

Glenn Rudebusch of the Federal Reserve Bank of San Francisco has argued that "the increased share of services instead of tangible goods in the economy's output...would tend to diminish the importance of inventory fluctuations and moderate the business cycle." Source: Glenn Rudebusch, "Will the Economic Recovery Die of Old Age?" FRBSF Economic Letter 2016-03, February 8, 2016. Briefly explain his reasoning. Part 2 A. If manufacturers produce more than they sell in one period, then the unsold units become inventories, which are used in the next period to meet demand and the firms produce less in the next period. The opposite happens if manufacturers underestimate demand in one period. In contrast, overestimating or underestimating the sales of services does not affect inventories so that fluctuations in production do not occur, which moderates swings in economic activity. B. If manufacturers produce less than they sell in one period, then the unsold units become inventories, which are used in the next period to meet demand and the firms produce more in the next period. The opposite happens if manufacturers overestimate demand in one period. In contrast, overestimating or underestimating the sales of services does not affect inventories so that fluctuations in production do not occur, which moderates swings in economic activity. C. If manufacturers produce more than they sell in one period, then the unsold units become inventories, which are used in the next period to meet demand and the firms produce more in the next period. The opposite happens if manufacturers underestimate demand in one period. In contrast, overestimating or underestimating the sales of services affects inventories in the opposite way, which smooths out fluctuations in production and moderates swings in economic activity. D. If service providers produce more than they sell in one period, then the unsold units become inventories, which are used in the next period to meet demand and the firms produce less in the next period. The opposite happens if service providers underestimate demand in one period. In contrast, overestimating or underestimating the sales of manufactured goods does not affect inventories so that fluctuations in production do not occur, which moderates swings in economic activity.

A. If manufacturers produce more than they sell in one period, then the unsold units become inventories, which are used in the next period to meet demand and the firms produce less in the next period. The opposite happens if manufacturers underestimate demand in one period. In contrast, overestimating or underestimating the sales of services does not affect inventories so that fluctuations in production do not occur, which moderates swings in economic activity.

Consider the data in the following table for the years 1969 and 1970 (where the values for real GDP and potential GDP are in 2012 dollars): 1969: - RGDP: $4.94 trillion - PGDP: $ 4.85 trillion - Unemployment: 3.5% 1970: - RGDP: $4.95 trillion - PGDP: $5.02 trillion - Unemployment: 4.9% a. In 1969, actual real GDP was greater than potential real GDP. Which of the following best explains this? A. The economy can produce a level of GDP above potential GDP in the short run. B. The economy is in a recession and thus potential GDP is less than actual GDP. C. The data reported by the Department of Commerce are incorrect. D. There has been a supply shock that has reduced potential output.

A. The economy can produce a level of GDP above potential GDP in the short run.

A student was asked to draw an aggregate demand and aggregate supply graph... to illustrate the effect of an increase in aggregate supply. The student drew the following graph: The student explained the graph as follows: "An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis? A. The student is incorrect because the aggregate demand curve does not shift because of the price level change. B. The student's analysis is correct. C. The student is incorrect because the price level should rise when SRAS increases. D. The student is incorrect because the aggregate demand curve should decrease, not increase.

A. The student is incorrect because the aggregate demand curve does not shift because of the price level change.

These carmakers are likely to react to the increase in inventories by A. producing fewer cars in the future. B. changing the design of their cars. C. producing more cars in the future. D. trying to increase worker productivity.

A. producing fewer cars in the future.

Automatic stabilizers can reduce the severity of a recession because, during a recession, A. unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment. B. student loan subsidies rise and tax collections fall, providing more spending ability to push the economy back to full employment. C. social security payments rise and tax collections fall, providing more spending ability to push the economy back to full employment. D. social security payments and student loan subsidies rise, providing more spending ability to push the economy back to full employment.

A. unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.

Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports. A. Increase, because U.S. exports are cheaper. B. Decrease, because U.S. exports are more expensive. C. Increase, because U.S. incomes rise. D. Decrease, because more U.S. exports are produced.

A. Increase, because U.S. exports are cheaper.

news article in 2021 noted that the Bureau of Economic Analysis (BEA) had issued a revised estimate of the change in real GDP during 2020. The article noted that the revision reflected, in part, "a bigger increase in business inventories" than previously estimated. Source: Martin Crutsinger, "Anticipating 2021 boom, Q4 GDP revised up slightly to 4.1%," apnews.com, February 25, 2021. Based on this information, is it likely that BEA revised its estimate of GDP upward or revised it downward? A. Upward, since higher levels of inventory investment increase GDP. B. Downward, since so many firms had to shut down because of the Covid-19 pandemic. C. Downward, since higher levels of inventory investment decrease GDP. D. Upward, since inventories indicate greater consumption, and consumption is part of GDP.

A. Upward, since higher levels of inventory investment increase GDP.

An article in the Wall Street Journal stated that at the beginning of May 2017, inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a 12% increase in actual vehicles on dealer lots compared with the prior year... That number is far above the industry norm for inventory..." Source: John D. Stoll and Adrienne Roberts, "As GM Adjusts to Changing Auto Market, Its Sales Slide Behind Ford's," Wall Street Journal, June 1, 2017. Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising? A. This would indicate that consumer preferences for pickup trucks compared to other vehicles had suddenly increased. B. If inventories are unexpectedly rising, this would indicate that sales of pickup trucks were lower than expected. C. This would happen if automakers expected the quantity of pickup trucks demanded to increase in the future. D. If inventories are unexpectedly rising, this would indicate that sales of pickup trucks were higher than expected.

B. If inventories are unexpectedly rising, this would indicate that sales of pickup trucks were lower than expected.

A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory where it was beginning to produce its Model 3 electric cars and its Nevada "Gigafactory" where it was producing lithium ion batteries for cars and other uses. The article quoted an investment analyst as saying: "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." Why would Tesla's engaging in this investment spending result in a significant boost to the economy? A. As households become more optimistic about the future of electric cars, they will save more money now to be able to buy an electric car later. B. It increases autonomous expenditures, causing an even larger increase through the multiplier effect on real GDP. C. It reduces the amount that households will need to purchase a car, which in turn, will lead to an increase in the MPS. D. Tesla's investment spending will lead to lower prices, which will increase the demand for Tesla's Model 3 cars.

B. It increases autonomous expenditures, causing an even larger increase through the multiplier effect on real GDP.

A publication of the Organization for Economic Co-operation and Development, a group of 36 high-income countries, notes, "The traditional view of international trade is that each country produces finished products that are then exported to consumers in another country. This type of trade, however, represents only 30% of total trade in goods and services." Source: Organization for Economic Cooperation and Development, "Trade Policy Implications of Global Value Chains," Trade Policy Brief, December 2018. a. What accounts for the other 70 percent of world trade? A. The other 70 percent of world trade is planned spending by firms on capital goods. B. The other 70 percent of world trade is the import and export of intermediate inputs. C. The other 70 percent of world trade is the import and export of finished products to non-OECD countries. D. The other 70 percent of world trade is government purchases of inputs for infrastructure improvements.

B. The other 70 percent of world trade is the import and export of intermediate inputs.

A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory where it was beginning to produce its Model 3 electric cars and its Nevada "Gigafactory" where it was producing lithium ion batteries for cars and other uses. The article quoted an investment analyst as saying: "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." What does the analyst mean by a multiplier? A. The difference between the cash revenues received by Tesla and the cash spending by the firm. B. The process by which an increase in autonomous expenditure leads to a larger increase in real GDP. C. The amount by which Tesla's production of Model 3 cars changes when its investment spending changes. D. The process that determines by how much employment will increase as a result of Tesla's increased production.

B. The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.

Writing in the Wall Street Journal, Martin Feldstein, an economist at Harvard University, argues that: "behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in "an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates." The behavioral response will be that people in A. lower tax brackets will have to pay more tax and thus work less. B. higher tax brackets will experience an increase in taxable income and thus will work more. C. lower tax brackets will experience an increase in taxable income and thus will work less. D. higher tax brackets will experience a decrease in taxable income and thus will work less.

B. higher tax brackets will experience an increase in taxable income and thus will work more.

On January 1, 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. According to an article in the Wall Street Journal, even 10 years later many Germans continued using the deutsche mark, and many stores in Germany continued to accept it. It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because A. the exchange rate between the deutsche mark and the euro is fixed. B. it is still accepted as legal tender for transactions. C. the government initially issued this currency. D. consumers are able to keep this a secret.

B. it is still accepted as legal tender for transactions.

What difficulties might problems with trade statistics cause for government policymakers? The trade statistics might A. mislead policymakers into thinking the current "country of origin" concept is the most accurate way to keep track of imports. B. mislead policymakers (and the public) in terms of the magnitude of a country's overall trade deficit or trade surplus. C. force producers to rely less on the global supply chain, making it difficult for policymakers to measure net exports. D. All of the above are correct.

B. mislead policymakers (and the public) in terms of the magnitude of a country's overall trade deficit or trade surplus.

According to the 2020 Diary of Consumer Payment Choice, a study conducted by the Federal Reserve's Cash Product Office, on a typical day, the average consumer 18 years of age and older held about $60 in currency. As noted in the chapter, there is actually about $6,000 of currency in circulation for every person (adult and child) in the United States. The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because A. the data the researchers collected was faulty. B. more than half of the currency is held outside the borders of the United States. C. most of the currency is in savings accounts. D. the consumers surveyed did not reveal the large sums they really carried around.

B. more than half of the currency is held outside the borders of the United States.

Consider the following statement: "Real GDP is currently $20.7 trillion, and potential real GDP is $20.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP." If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by Part 3 A. exactly $300 billion. B. more than $300 billion. C. less than $300 billion. D. None of the above; equilibrium real GDP would actually increase. Therefore, the statement above is _______.

B. more than $300 billion. - incorrect

The following was written by a political columnist: "Today...the main purpose [of government's issuing bonds] is to let craven politicians launch projects they know the public, at the moment, would rather not fully finance. The tab for these projects will not come due, probably, until after the politicians have long since departed for greener (excuse the expression) pastures." There may be some truth in the columnist's argument, but an economist might argue that A. the government should borrow to pay for all projects whether they are short-lived or long-lived projects. B. taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future. C. taxpayers in one year should have to pay for a project that will benefit other taxpayers well into the future. D. the government should never borrow.

B. taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future.

An article in the Wall Street Journal on fintech firm Social Finances Inc. (SoFi) noted that "SoFi's main business of refinancing student loans is particularly sensitive to interest rates. Lacking its own base of deposits, the company borrows money at variable rates from banks to then lend to recent graduates." What does the article mean by a "base of deposits"? What do conventional banks use their base of deposits for? By a "base of deposits," the article is referring to A. the money that fintech firms like SoFi borrow from conventional banks to lend out. B. the customer deposits that conventional banks use to make loans. C. the collateral that conventional banks require in order to take out a loan. D. the interest rate that borrowers are required to pay when they take out a loan.

B. the customer deposits that conventional banks use to make loans.

Two examples of automatic stabilizers in the U.S. are A. social security payments and the regressive income tax system. B. unemployment insurance payments and the progressive income tax system. C. the proportional income tax system and student loan subsidies. D. social security payments and the proportional income tax system.

B. unemployment insurance payments and the progressive income tax system.

Now assume that there is a large increase in demand for U.S. exports. At the new short run equilibrium, the unemployment rate will lower compared to the unemployment rate at the initial equilibrium, prior to the increase in exports. Which of the following best explains how the economy will adjust back to long-run equilibrium? A. Short-run aggregate supply will increase (shift rightward) as firms and workers adjust to the new price level. B. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. C. Aggregate demand will increase, restoring the original equilibrium price and quantity. D. Aggregate demand will decrease, restoring the original equilibrium price and quantity.

B. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.

What is meant by supply-side economics? Part 2 A. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to decrease long-run aggregate supply. B. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply. C. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase short-run aggregate supply. D. Supply-side economics refers to the use of taxes to decrease incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.

B. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.

Thor Industries manufactures Airstream and other recreational vehicles (RVs). In late 2020, an article in the Wall Street Journal stated that the inventories of RVs held by Thor dealers were "at historically low levels." Source: Matt Grossman, "Recreational Vehicle Sales Rise as New Buyers Take to the Highway," Wall Street Journal, September 28, 2020. Part 2 a. If dealer inventories of RVs were at very low levels, what must have been true of the relationship between sales at Thor's dealers and Thor's production of RVs? nventories were at historically low levels because A. Thor's dealers were selling fewer RVs than Thor Industries was producing. B. Thor's dealers were selling more RVs than Thor Industries was producing. C. Thor Industries was facing decreased competition from other RV manufacturers. D. Thor Industries was facing increased competition from other RV manufacturers.

B. Thor's dealers were selling more RVs than Thor Industries was producing.

An opinion column on cnbc.com by the president of a banking association in Florida argued, "Local banks are important because our country thrives on small businesses, which employ a majority of Americans. . . . [For small businesses,] lenders of choice tend to be community banks." Are small businesses more likely to rely on banks for funding than would large corporations? A. No, because large corporations are equally as likely as small businesses to rely on banks for funding. B. Yes, because small businesses lack the ability to sell stocks and bonds on financial markets. C. No, because small businesses usually sell stocks and bonds or other financial securities to meet their credit needs. D. Yes, because small businesses often borrow larger amounts of money than do large corporations.

B. Yes, because small businesses lack the ability to sell stocks and bonds on financial markets.

In September 2011, more than two years after Congress and the Obama administration had enacted the 2009 stimulus package, a poll conducted by the Washington Post and ABC News found that only 17 percent of those polled thought that the "Obama economic program" was "making the economy better." Thirty-four percent thought it was making the economy worse, and 47 percent thought it was having no effect. How can economists judge whether the stimulus program was effective? A. It is a simple matter for economists to determine the effectiveness of the stimulus package by analyzing its effects on increasing real GDP and reducing cyclical unemployment. B. Economists try to determine if the stimulus package pushed real GDP further away from potential GDP and reduced structural unemployment, but since other factors affect GDP and unemployment at the same time, it is difficult to separately identify the effectiveness of the package itself. C. Economists try to determine if the stimulus package pushed real GDP closer to potential GDP and reduced cyclical unemployment, but since other factors affect GDP and unemployment at the same time, it is difficult to separately identify the effectiveness of the package itself. D. Economists focus on determining if the stimulus package was effective at reducing both the inflation rate and the unemployment rate to judge how effective it was in increasing real GDP.

C. Economists try to determine if the stimulus package pushed real GDP closer to potential GDP and reduced cyclical unemployment, but since other factors affect GDP and unemployment at the same time, it is difficult to separately identify the effectiveness of the package itself.

Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget? Part 4 A. If the budget is balanced at potential GDP and the economy moves into recession, then the budget will remain balanced as government expenditure decreases and tax revenue decreases will exactly offset each other. B. If the budget is balanced at potential GDP and the economy moves into recession, then the budget will remain balanced as government expenditure increases and tax revenue decreases will exactly offset each other. C. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease. D. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures decrease and tax revenues increase.

C. If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Consider the data in the following table for the years 1969 and 1970 (where the values for real GDP and potential GDP are in 2012 dollars): 1969: - RGDP: $4.94 trillion - PGDP: $ 4.85 trillion - Unemployment: 3.5% Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not change? A. Labor productivity declined, and thus the demand for labor fell, creating unemployment. B. There must have been a decrease in aggregate demand that caused a recession. C. Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment. D. Because there was more inflation, there must be more unemployment.

C. Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment.

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP? A. The Fed intends to raise interest rates to make buying new houses less expensive. B. The Fed intends to reduce real GDP so that real GDP will grow again but at a faster pace. C. The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP. D. The Fed intends to reduce unemployment, which occurs if real GDP is greater than potential GDP.

C. The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.

In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-point increase in the Fed's range for overnight target rates," while another article noted, "the U.S. central bank's discount rate...has been set at 0.75% since February 2010." What is the name of the "target interest rate" mentioned in this article? A. The mortgage rate. B. The prime rate. C. The federal funds rate. D. The discount rate.

C. The federal funds rate.

In 2021, an article in the Wall Street Journal on the housing market stated, "U.S. home sales in 2020 surged to their highest level in 14 years, fueled by ultralow interest rates." Source: Harriet Torry, "U.S. Existing-Home Sales Reach Highest Level in 14 Years," Wall Street Journal, January 22, 2021. a. Why do low interest rates increase the quantity of homes that households demand? A. The lower the interest rate, the lower the price that sellers are willing to accept for their home. B. Lower interest rates induce consumers to spend less money save more for future home purchases. C. The lower the interest rate, the less expensive it is for households to borrow money. D. When interest rates are low, the supply of housing increases. Part 2

C. The lower the interest rate, the less expensive it is for households to borrow money.

What advantages might fintech firms like SoFi have over conventional banks that would allow them to succeed in making loans even though they lack a base of deposits? A. The computer algorithms used by fintech firms are better at evaluating borrowers' creditworthiness than conventional banking methods. B. People who borrow from fintech firms are more likely to default on their loans, thus allowing them to make a profit on the collateral they seize. C. The operating costs of fintech firms may be lower than conventional banks, thus allowing them to still make a profit. D. Fintech firms have no advantages over conventional banks. They cannot make money if they lack a base of deposits.

C. The operating costs of fintech firms may be lower than conventional banks, thus allowing them to still make a profit.

What is the relationship between the federal funds rate falling and the money supply increasing? A. Cutting the federal funds rate increases saving, which increases the money supply. B. Cutting the federal funds rate increases the money supply. C. To decrease the federal funds rate, the Fed must increase the money supply. D. Cutting the federal funds rate increases bank reserves, which increases the money supply.

C. To decrease the federal funds rate, the Fed must increase the money supply.

In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." How does lowering the target for the federal funds rate "pour money" into the banking system? A. To increase the money supply, the Fed increases government spending, which increases aggregate demand. B. To increase the money supply, the Fed decreases taxes, which increases consumer spending. C. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves. D. To increase the money supply, the Fed sells bonds on the open market, which increases bank reserves.

C. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote this: "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment and, with the help of the repercussions, the real income of the community...would probably become a good deal greater than it is." By repercussions, Keynes means that an initial increase in autonomous expenditures will A. change production by an amount less than the initial increase in autonomous expenditures. B. change production by an amount just equal to the initial increase in autonomous expenditures. C. change production by an amount greater than the initial increase in autonomous expenditures. D. have no impact on production.

C. change production by an amount greater than the initial increase in autonomous expenditures.

A report from the Congressional Budget Office (CBO) noted, "Real potential GDP is the maximum sustainable output of the economy adjusted to remove the effects of inflation." In 2020, real GDP was $18.4 trillion, and the CBO's estimate of potential GDP was $19.3 trillion. In early 2021, the CBO forecast that in 2022 real GDP would be $19.8 trillion and potential GDP would be $20.0 trillion. The CBO includes the word sustainable in its definition of potential GDP because A. this is the level of GDP at which the economy is free of poverty, hunger and environmental degradation. B. this level of GDP is based on available renewable resources. C. given the available resources in the economy, this is level of GDP that can be maintained. D. this is the level of GDP that can meet human development goals while maintaining the ability of natural systems to continue to provide the needed natural resources.

C. given the available resources in the economy, this is level of GDP that can be maintained.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote this: "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment and, with the help of the repercussions, the real income of the community...would probably become a good deal greater than it is." Keynes appears unconcerned if government spending is wasteful because A. the resulting decrease in production will mean less in taxes that have to be paid. B. the repercussions will eliminate the part of the spending that is wasteful. C. it will still lead to an increase in production and employment. D. None of the above; Keynes is concerned that the spending is wasteful.

C. it will still lead to an increase in production and employment.

Now assume that there is a large increase in demand for U.S. exports. At the new long-run equilibrium, A. real GDP and price level will be higher and the unemployment rate will be lower compared to the initial equilibrium, prior to the increase in exports. B. real GDP and the price level will be higher but the unemployment rate will remain the same compared to the initial equilibrium, prior to the increase in exports. C. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports. D. real GDP, the unemployment rate and the price level all will remain the same compared to the initial equilibrium, prior to the increase in exports.

C. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.

Country X is a growing economy located in southeast Asia. Although it has a large population, it also has a disproportionately high number of working-age people. A large English-speaking workforce and low labor costs make it a competitive outsourcing destination. However, as is the case with most growing economies, inflation is quite high in Country X. As a country that is poised to be an economic superpower, Country X's stock markets are booming. Real estate prices have been increasing by 20 percent every year. Salim Habib is a guest speaker at a talk organized by one of the leading universities in the country. He states that with high inflation, interest rates are bound to increase. Consequently, consumption and investment will fall. Ricky Cafrall, a student, is not convinced. He claims that the rally in housing and stock prices will actually increase household wealth and consumption. In claiming that household wealth and consumption will increase, Ricky is ignoring: A. the fact that stocks and houses form a part of household wealth. B. a person's marginal propensity to consume. C. the real value of household wealth. D. the fact that employment is increasing. E. the fact that disposable income and consumption are positively correlated.

C. the real value of household wealth.

Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. Assume that banks want to keep 10 percent of their deposits as reserves. The maximum total increase in the money supply that can result from the Fed's discount loan is A. $90 million. B. $9 million. C. $100 million. D. None of the above.

C. $100 million.

The European Central Bank (ECB) issued the following statement after its June 2017 monetary policy meeting on monetary policy: Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. Based on the European Central Bank's statement do you expect that the inflation rate is above or below the ECB's inflation target? Briefly explain. A. Above, because the ECB's use of this non-standard monetary policy is aimed at slowing economic growth. B. Above, because the ECB's statement indicates that it is using contractionary monetary policy to achieve its policy goals. C. Below, because the ECB's use of this non-standard monetary policy is intended to increase the money supply. D. Below, because the ECB's use of this non-standard monetary policy is designed to raise the discount rate.

C. Below, because the ECB's use of this non-standard monetary policy is intended to increase the money supply.

In September 2011, more than two years after Congress and the Obama administration had enacted the 2009 stimulus package, a poll conducted by the Washington Post and ABC News found that only 17 percent of those polled thought that the "Obama economic program" was "making the economy better." Thirty-four percent thought it was making the economy worse, and 47 percent thought it was having no effect. Might most people responding to the poll have believed that the stimulus package wasn't helping the economy—even if it was? Briefly explain. A. No, since people who are chosen to participate in polls always know more about what goes on than learned experts and government officials who, despite devoting their careers to improving the lives of the people they serve, rarely get anything right. B. No, since the recession continued for some time, the evidence clearly showed that the stimulus measures were ineffective and may have even made the economy worse. C. Yes, possibly because the recession was so severe that despite the stimulus package offsetting and lessening its severity, the measures did not end the recession and restore full employment, but did increase the budget deficit. D. Yes, possibly because the Washington Post deliberately polled only people who were biased against the Obama administration and also believed that the federal government should not interfere in any way with the workings of the market economy.

C. Yes, possibly because the recession was so severe that despite the stimulus package offsetting and lessening its severity, the measures did not end the recession and restore full employment, but did increase the budget deficit.

In 2021, a columnist writing on barrons.com predicted that the U.S. economy was going to experience an increase in productivity. In March 2021, Congress enacted a $1.9 increase in spending, formally called The American Rescue Plan Act of 2021. What effect would an increase in productivity have on the short-run and long-run aggregate supply curves? A. The short-run aggregate supply curve will shift to the right, while the long-run aggregate supply curve will shift to the left. B. The short-run aggregate supply curve will shift to the right, while the long-run aggregate supply curve will not change. C. The long-run aggregate supply curve will shift to the right, while the short-run aggregate supply curve will not change. D. Both the short-run and long-run aggregate supply curves will shift to the right.

D. Both the short-run and long-run aggregate supply curves will shift to the right.

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the 2020? Part 2 A. Investment increased steadily but consumption continued to fall after 2001. B. Investment fluctuated but consumption remained stable without much increase or decrease during this period. C. Both consumption and investment increased but consumption fluctuated more than investment. D. Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007−2009 recession.

D. Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007−2009 recession.

c. What are the likely consequences of the low levels of inventories for employment in Elkhart, Indiana, where Thor Industries is headquartered, in the following months? As a result of declining inventories, Thor Industries will likely increase production and hire more workers in Elkhart. Part 5 What additional information would you need to give you more confidence in your answer? A. Information on the unemployment rate would verify if the firm did indeed hire more workers. B. A look at the number of unemployment claims in the city or state would verify if the firm did indeed hire more workers. C. A look at the demographics of people who prefer RVs to cars or pickup trucks would verify if the firm did indeed hire more workers. D. Only A and B are correct. E. All of the above are correct.

D. Only A and B are correct.

Why might a small business have more success obtaining a loan from a local community bank than from a national bank? A. Community banks typically have long-term relationships with local businesses and can more easily assess their creditworthiness. B. Community banks are able to offer a wider variety of services to small business owners than national banks. C. Community banks have a better understanding of the circumstances that affect local firms than national banks do. D. Only A and C are correct. E. All of the above are correct.

D. Only A and C are correct.

Suppose the economy enters a recession. If government policymakers-Congress, the president, and members of the Federal Reserve-do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run. A. Statement i is correct. B. Statement iii is correct. C. Statement iv is correct. D. Statement ii is correct.

D. Statement ii is correct.

Consider the following table: 2012 Potential GDP $14.7 trillion Real GDP $14.7 trillion Price Level 110 2013 Potential GDP $15.3 trillion Real GDP $15.4 trillion Price Level 114 What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? A. The Fed will pursue an expansionary fiscal policy. B. The Fed will pursue an expansionary monetary policy. C. The Fed will pursue a contractionary fiscal policy. D. The Fed will pursue a contractionary monetary policy.

D. The Fed will pursue a contractionary monetary policy.

U.S. federal government expenditures are comprised of purchases of goods and services (defense spending plus spending on all day-to-day activities), transfer payments, interest payments, and grants to state and local governments. Which of the following statements is true? Part 2 A. Interest payments are the largest component of the federal budget (about 50%) followed by spending on all its day-to-day activities (about 13%), while defense spending is the smallest component (about 5%). B. Spending on all its day-to-day activities is the largest component of the federal budget (about 50%) followed by grants to state and local governments (about 13%), while interest payments are the smallest component (about 5%). C. Grants to state and local governments are the largest component of the federal budget (about 50%) followed by spending on all its day-to-day activities (about 13%), while transfer payments are the smallest component (about 5%). D. Transfer payments are the largest component of the federal budget (about 50%) followed by defense spending (about 13%), while spending on all its day-to-day activities is the smallest component (about 5%).

D. Transfer payments are the largest component of the federal budget (about 50%) followed by defense spending (about 13%), while spending on all its day-to-day activities is the smallest component (about 5%).

In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argue that the European Union, an organization of 27 countries in Europe, should have "a commissioner for budgetary discipline." They believe that: "The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits." An "excessive" budget deficit in this context is A. a budget deficit that has bankrupted the government. B. a budget deficit that inevitably forces a bond rating agency to lower the rating on the country's debt. C. a budget deficit that makes the economy grow by increasing income and employment. D. a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules

D. a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules

To reduce a budget deficit, A. trade deficits need to be reduced by increasing imports and decreasing exports. B. budgetary policies such as increasing spending and lowering taxes can be used. C. trade deficits need to be increased by increasing exports and decreasing imports. D. budgetary policies such as increasing taxes and cutting expenditures can be used.

D. budgetary policies such as increasing taxes and cutting expenditures can be used.

An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy." This statement is false because the aggregate demand curve is A. downward sloping for the same reasons as a demand curve for a single product. B. upward sloping for the same reasons as a demand curve for a single product. C. upward sloping because as prices rise, consumer wealth increases, interest rates fall, and exports become more expensive. D. downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.

D. downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.

Automatic stabilizers are A. changes in business taxes that occur when the economy slows down. B. budgetary cuts that occur automatically at the end of the fiscal year if there is a deficit. C. changes in the money supply that occur automatically when money demand changes. D. government spending and taxes that automatically increase or decrease along with the business cycle.

D. government spending and taxes that automatically increase or decrease along with the business cycle.

Cuts in marginal tax rates will A. have no measurable impact on saving and investment and therefore will not increase total tax revenue. B. have only demand side effects and will have no supply side effect on labor supply. C. decrease marginal net-of-tax income, decrease the supply of labor and decrease total taxes as people work less. D. increase marginal net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours.

D. increase marginal net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours.

The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because more than half of the currency is held outside the borders of the United States. Because of this, A. international interest rates are too high. B. international interest rates are too low. C. the M2 monetary aggregate is a good measure of the U.S. money supply. D. the M1 monetary aggregate is a poor measure of the U.S. money supply.

D. the M1 monetary aggregate is a poor measure of the U.S. money supply.

Does the Fed's dual mandate require it to attain a zero percent unemployment rate? Briefly explain. A. No, because even when the economy is at full employment, some people will always be cyclically unemployed. B. Yes, because without a zero percent unemployment rate, GDP will be below its potential level. C. Yes, because without a zero percent unemployment rate, there will be financial distress in the economy. D. No, because even when the economy is at full employment, there is still a natural rate of unemployment.

D. No, because even when the economy is at full employment, there is still a natural rate of unemployment.

Georgina Paul, a student of economics, was studying the last decade's money supply data for her country X. Georgina noticed that M2 has consistently been higher than M1 and the ratio of M1 to M2 was more or less stable at around 0.3 for most of the years. However, although the central bank of X did not conduct any expansionary monetary policy in recent times, the ratio M1:M2 increased considerably to 0.7 in the last two years. Which of the following, had it happened in the last two years, would explain this outcome? A. The widespread use of credit cards reduced the usage of traveler's checks. B. A neighboring country, that was earlier using X's currency, introduced its own currency. C. With people becoming more risk-averse, investment in time deposits increased significantly. D. Foreign investment in domestic money market mutual funds increased significantly. E. The central bank introduced high interest rates on checking accounts which induced people to move funds from small-denomination time deposits to checking accounts.

E. The central bank introduced high interest rates on checking accounts which induced people to move funds from small-denomination time deposits to checking accounts.

___ represent total government spending including goods, services, grants to state and local governments, and transfer payments.

Government expenditures

_______ are spending by the government on goods, services, and factors of production.

Government purchases

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